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What’s the Deal with a $15 Minimum Wage?

Arguing that no full-time worker should be paid so little as to live in poverty, Bernie Sanders supports increasing the minimum wage to $15 per hour by 2020. This is part of his plan for reducing income inequality in the United States. Unfortunately, raising the minimum wage, especially by such a large amount, will reduce the incomes of many low-wage workers by making fewer jobs available.

To be sure, an increase in the minimum wage does benefit many workers. It benefits not only workers who were paid below the new minimum, but also skilled workers who are already earning wages above the minimum. Proponents concede that some workers may lose their jobs, but argue that their losses will be more than offset by wage gains for most low-wage workers.

That said, there is also no question that many low-wage workers will have a harder time finding jobs if the minimum wage is increased from its current level of $7.25 to $15.00 per hour. The goal of business owners is to make a profit, and to maximize profit they must charge a high enough price to cover the cost of producing each unit of output. If wages increase without a comparable increase in workers’ productivity and firms continue to charge the same price as before, they will find that some of the output they sold when costs were lower is no longer profitable to sell. Thus prices are likely to increase. But if firms increase prices, they can expect to sell less of their product than before.

Proponents of a minimum-wage increase argue that it will lower turnover and motivate workers to be more productive. This may happen in some cases, but if raising wages increases productivity and lowers turnover by enough to enable firms to earn as much or more profit as they did paying lower wages, firms will eventually figure out that it is in their interest to raise wages regardless of whether a minimum-wage increase requires them to do so.

For most minimum-wage workers, it is not likely that productivity will double if the minimum wage is doubled. In firms where productivity does not increase as much as the minimum wage increases, fewer workers are likely to be hired or retained. Recent research, published by American Action Forum, estimates that increasing the federal minimum wage to $15 would lower employment by between 3.3 million and 16.8 million workers.

Some employers, such as Walmart, have politically supported an increase in the minimum wage, arguing that a higher minimum wage, by raising workers’ purchasing power, would increase the demand for their products, thus making it possible for them to employ more workers. Raising workers pay without increasing their productivity, however, will not increase overall purchasing power in the economy. If workers as a group earn more, then owners of firms will earn less. This will change the distribution of income and likely change the mix of goods and services demanded. Firms experiencing increased demand will hire additional workers, but those experiencing reduced demand will reduce the number of workers they employ. With no increase in the aggregate demand for labor and higher average labor costs, the total number of workers employed is likely to decrease.

Unions usually provide strong political support for minimum-wage increases, in spite of the fact that most unionized workers earn well above the minimum wage. This is because when faced with a higher minimum wage, firms often will replace unskilled workers earning close to the minimum with some combination of machinery, technology, and skilled workers. If firms switch to more mechanized production methods, they will need more skilled workers, who may be unionized, to operate the machines.

Most workers earning the minimum wage are not living in poverty. The Congressional Budget Office estimates that 35 percent of minimum-wage workers are from families earning incomes greater than three times the federal poverty level. Only about 20 percent of workers earning less than $11.50 per hour are from families with incomes below the poverty level.

The lost income of those who become unemployed due to an increase in the minimum wage may be less than the increased earnings of those who continue to be employed. Nevertheless, being unemployed can have a much more harmful impact on a person’s wellbeing than earning a low wage. Work experience is critical to the long-term success of workers from disadvantaged backgrounds. For workers with a high school education or less, one of the best ways to get skills and develop good work habits is through training provided by an employer. Providing training is costly, however, so that the higher the wage, the less likely an employer will risk providing training to an unproven worker. With a lower minimum wage, more firms could afford to incur the cost of on-the-job training, so it would be easier for workers with limited education and experience to find jobs and gain marketable skills that would enable them to move up the ladder to better paying jobs in the future.

While more than doubling the minimum wage makes for a great political stump speech, the realities of such a move could prove to be not so great for the American worker.

Dr. Tracy C. Miller is an associate professor of economics at Grove City College and fellow for economic theory and policy with The Center for Vision & Values. He holds a Ph.D. from University of Chicago.